Interactive Investor

Everything you need to know about tax year end

1st April 2022 10:19

Faith Glasgow from interactive investor

Find out when the tax year ends, why tax deadlines are important, implications for ISAs and pensions, and some clever tax wheezes.

What is the tax year?

The tax year, as the name implies, runs for 12 months, and it is used as the defining time period for government and individual tax affairs.

When does it run from?

Unhelpfully, it doesn’t sit neatly alongside the calendar year. The UK tax year runs from 6 April each year to 5 April the following year.

That’s pretty random!

Indeed. You might think life would be simpler if it did coincide with the calendar year, or at least with the end of a calendar month, as it does in other countries: for instance, the US follows the calendar year, while India uses 31 March and Australia 30 June. You might also wonder whether, in this era of globalisation, it would be convenient to have a tax year aligned with that of other countries.

It’s not inconceivable that change may happen in due course. The government published a report in 2021 exploring the possibility of shifting the UK tax year to either the end of December or the end of March – but don’t hold your breath. Any change would be a big upheaval, and there are more immediate issues to wrestle with at present.

Why is the tax year end important for me as an employee?

The tax you pay on your earnings is calculated on an annual basis, so it ‘resets’ at the start of each tax year.

If you pay tax automatically through Pay As You Earn (PAYE) as most people do, it is deducted from your wage or salary by your employer before you are paid each week or month. Your employer uses the tax code provided by HMRC to know how much to deduct.

The same process, using your personal tax code supplied by HMRC, applies to pension payments made by a pension provider.

As an employee, you will receive a P60 from your employer after the end of the tax year and before 31 May, telling you how much tax you have paid in the tax year just past. You’ll get a separate P60 from every employer.

It’s an important form: for instance, you’ll need it to reclaim overpaid tax, or to prove your income if you apply for a mortgage.

If you have paid too much or too little tax over the period, you’ll be notified by HMRC after the end of the tax year. If you have not paid the right amount at that point, you’ll be sent a P800 or a Simple Assessment tax calculation in the new tax year. The P800 or Simple Assessment will tell you how to settle or reclaim the balance.

What about if I’m self-employed?

If you’re self-employed, you don’t have an employer to deal with your tax obligations, so you will probably need to fill in a self-assessment form detailing what you’ve earned and offsetting expenses you’ve incurred in the course of your work over the tax year.

Other people may also have to complete self-assessment (SA) forms, for instance if they have extra income from rental properties or other investments, or capital gains to declare, or want to claim income tax relief, for instance on charity donations.

When a self-assessment form is involved, there are some key dates you need to bear in mind.

If you want to register for SA, you need to do so by 5 October after the end of the tax year in question. Paper SA forms must be filed by 31 October.

The deadline for filing online SA forms is 31 January following the end of the tax year; so for example self-employed people have recently filed their forms for the tax year ending 5 April 2021, while forms for the 2022 tax year must be submitted by the end of January 2023.

Tax payments must also be made by 31 January.

And what happens if I miss a deadline?

You’ll receive a fixed £100 fine from HMRC if your tax return is up to three months late; and more if it’s later, or if you miss the payment deadline.

(An extra month has been allowed this year both to file SA forms and to make tax payments, because of the impact of Covid.)

If you’re struggling to pay the amount you owe for a specific tax year, it’s important to contact HMRC, as you may be able to pay in instalments.

More generally, if you’re not in a position to pay tax bills as a single lump sum, HMRC provides a budget payment plan to help spread the cost through regular weekly or monthly payments that go towards reducing the next tax bill.

What’s the big deal with ISAs at tax year end?

Tax year end is also the point at which your annual investment allowances close, with a new allowance coming into force next day, on the first day of the new tax year.

So to make use of the current tax year’s £20,000 ISA allowance, you need to have paid the cash into an ISA account by 5 April (even if you have not yet allocated it to specific stocks or funds).

If you want to make use of several different types of ISA, that’s fine. You can split your £20,000 across cash, stocks and shares, Lifetime and Innovative Finance ISA accounts if you wish, but you’re only allowed to open one of each type.

And, of course, it must all be done and dusted by 5 April. If you don’t use the current tax year’s ISA allowance, you’ve lost it for ever.

Same for pension contributions?

Not quite. You’re allowed to contribute up to the value of your earnings for this tax year, capped at £40,000, into a workplace or personal pension or a SIPP.

However, if you have spare cash you’d like to pay in over and above that amount (perhaps a generous work bonus, or an inheritance), you can also ‘carry forward’ unused pension allowance from the past three tax years.

So if you’d made no pension contributions for the previous few years, you could in principle pay up to £160,000 into your pension account. You would need to declare allocations against allowance carried forward from previous years on a self-assessment form.

How about other clever tax wheezes?

Any tax planning you do with the aim of reducing the amount of tax you pay this tax year must be in place by 5 April.

That might include, for instance, utilising the capital gains tax allowance of £12,300 for 2021-22, which again will be lost if it’s not used before tax year end. If you sell taxable investments where you’ve made a profit, up to the value of the CGT allowance, then you’ll keep a lid on unwanted CGT in future years.

The rules don’t allow you to buy the same stock back within 30 days; however, if you have unused ISA allowance for this tax year you could repurchase it within your ISA account and take it out of the equation for CGT altogether in future.

In fact, even if you don’t have spare money to invest in your ISA account this year, it’s a really sensible idea to use that spare allowance to ‘bed and ISA’ – sell and repurchase within the tax wrapper – any ‘unwrapped' investments you own on which you could potentially pay tax in the future, even if tax is not an issue now.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.